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Discussion of Tax Issue on Claiming Dependant

In: Business and Management

Submitted By jennyallensuu
Words 580
Pages 3
In the case, the married couple Ted and Ruth are planning to sell their principal residence in Richmond and purchase a new one after that. Meanwhile, they and their families use their vacation home in Maryland on a frequent basis. The main tax issues we need to examine here are (1) How much gain should Ted and Ruth realize and recognize on sale of their principle residence? What is the nature of such gain? Should they include the gain in their gross income? (2) Are Ted and Ruth allowed to deduct expenses for their vacation home on the joint tax return?
According to Internal Revenue Code section 121 (a) & (b), individuals can exclude up to $250,000 gain from gross income on sale of a main home (or $500,000 for joint returns) as long as they have owned the home and used the home for a minimum of two years. The two years are aggregating which means your living period in the house does not need to be consecutive. However, the $500,000 limitation does not apply to the married couple in our case since Ted fails the use requirements mentioned above (section 121 (b) (2) (A) (ii)). Since Ted moved into the Richmond home on December 13 of 2010 and that the sale date is September 1 of 2012, his stay in the house is less than two years. The amount they can exclude should be the sum of each spouse’s limitation amount determined on a separate basis as if they had not been married (section 121 (b) (2) (B)). Since Ted would not have owned the house if he had not married to Ruth, the amount of gain they can exclude shall not exceed $250,000.
Now let us look at how much gain will be realized on the sale. According to section 1014 (a) (1), basis of Ruth’s house, from which she inherited from her mother, shall be the fair market value ($315,000) upon Ruth mother’s death. Given that the selling price is $700,000, Ted and Ruth realize $385,000 gain. But the couple can only exclude...

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